Shutdown could shake investor confidence

US markets could be hit by investor confidence should an adverse market event occur in the absence of regulatory oversight during the US government shutdown, but exchanges’ self-regulatory status will ensure market continuity.

US markets could be hit by investor confidence should an adverse market event occur in the absence of regulatory oversight during the US government shutdown, but exchanges’ self-regulatory status will ensure market continuity.

The Securities and Exchange Commission (SEC) confirmed to theTRADEnews.com there is no fixed date by which it would have to temporarily shed non-essential staff due to the lapse in appropriations. A statement issued prior to last week’s shutdown stated the SEC would maintain full operations for several weeks during the shutdown.

Joseph Saluzzi, US market structure expert and co-founder of agency broker Themis Trading, said if an event similar to the 2010 flash crash or the glitch experienced by exchange operator Nasdaq OMX in August that led to a three-hour trading halt, the US equities market would be affected by a lack of investor confidence. This would be intensified if a market event led to market circuit breakers being tripped and trading stopped, he added.

“People want to feel that the regulators are there,” Saluuzzi told theTRADEnews.com. “For a situation like the flash crash where the market dropped then recovered within an hour, there’s not much the regulator could do, but if the market did stop and closed for the rest of the day, that would be a problem.”

The flash crash sent the Dow Jones Industrial Average down around 1000 points, or 9%, and stands as the biggest one-day point decline in the index’s history. The market has grappled with a number of high-profile exchange glitches in recent years, including the problematic Facebook IPO on Nasdaq, issues with the BATS Global Markets IPO and an algorithmic error on behalf of Knight Securities that saw the firm drop US$440 million in value.

Saluzzi said such a close could spark market drops in Asia and Europe, which would lead regulators and investors from those jurisdictions to call upon the SEC for action to shore up market confidence.

But, Saluzzi maintained the role of US exchanges as self-regulatory organisations (SROs) meant there was a “first line of defence” for any such event, in addition to circuit breaker systems such as the limit up-limit down rule.

“It’s up to exchanges to ensure their markets are running properly. If there’s a situation while the government is down, it just means the post-mortem will be delayed further,” he said, citing the SEC’s five-month investigation into the flash crash.

Tom Wittman, senior vice president of transaction services for Nasdaq OMX, who heads up trading operations in equities and derivatives for the firm’s three US equities exchanges and three options exchanges, said the SRO status of exchanges ensured the market would run smoothly should the SEC reduce its headcount during the government shutdown.

“The US exchanges are SROs upon which the SEC relies to maintain continuous markets,” he said. “We plan to stay open for trading. Our market surveillance operations and market access rules help ensure that American investments are properly facilitated during any government shutdown period.”

While the SEC continues to operate at full capacity, fellow regulator the Commodity Futures Trading Commission has already reduced its headcount from 680 to just 25 in line with the US Antideficiency Act.

The Financial Industry Regulatory Authority (FINRA) will not be affected at all by the lapse in appropriations as it is not a government agency or funded by taxpayer dollars, it said in a statement. FINRA operates under authorisation from Congress as an independent not-for-profit organisation. Despite this, relevant FINRA decisions must be approved by the SEC, which could lead to operational lag time should the commission reduce staffing numbers.